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Practice English Speaking&Listening with: Will Italy Be the Next Country to Leave the EU? (w Steve Diggle & Grant Williams)

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GRANT WILLIAMS: The second leg of our journey will take us through the Tuscan countryside

from Florence to Siena, home of the world's oldest and possibly most troubled bank-- Banca

Monte dei Paschi.

STEVE DIGGLE: So Siena-- where we're about to arrive, when this traffic lets up-- GRANT

WILLIAMS: Hopefully.

STEVE DIGGLE: --not a hugely important city, though a very beautiful one-- but in medieval

Italy, one of the great trading centers and Florence's great rival for hundreds of years

as a destination for merchants, and business, and political influence.

So they fought each other for centuries-- 2 and 1/2 centuries, at least, on and off--

in this very medieval way, which was-- you don't actually do any of the fighting yourself.


STEVE DIGGLE: You hire a mercenary-- GRANT WILLIAMS: Mercenary.


STEVE DIGGLE: --made up of the scum of Europe-- English-- --German, Swiss, Belgians-- to do

the fighting for you.

And these are, really, quite small armies but Siena didn't actually formally come under

the control of Florence until the 16th century, when it was actually controlled by the Hapsburg


And they owed a great deal of money to the Medici banking house.

GRANT WILLIAMS: Didn't everybody?

STEVE DIGGLE: So the Medici acquired Siena in a debt-for-equity swap.

2 and 1/2 centuries of fighting, but they're actually acquired in a financial transaction.

And Florence having aborted, essentially, in a debt-for-equity swap, then controlled

the growth and development of Siena in the traditional way-- by imposing punitive taxes

on the place, so that Florence was a much better place to do business than Siena.

And so Siena never grew, which has turned out to be a great blessing for it.

Everything's still intact.

Why is everything intact?

Because no growth.

However, despite being only 55,000 people these days, they still have to have their

own divisions, which they do.

And you will find an interesting story about the subdivisions of Siena, which I'll tell

you when we arrive.

GRANT WILLIAMS: This is beautiful.

Look at this.

STEVE DIGGLE: Look at this.

Look at this.

Here's a place with a population of, when they built this, 80,000, 100,000.

I mean, it's a small town most anywhere else in the world, but they thought they needed


The scale of the ambition is amazing.

So we're in Florence, and now we're in Siena, only a few miles apart-- mortal enemies.

To this day, people in Siena still don't like Florentines.

But when Sienese get together, they're not united.

They're part of these 17 contrada-- 17 contrada.

So the population of Siena these days is like 55,000 people-- GRANT WILLIAMS: Is that all--



Florence ensured that this place would never flourish, by having differential tax rates,

which is interesting, right?

Because you can fight someone for 2 and 1/2 centuries but if you really want to restrict

it, you impose taxes on it-- so drove all the business to Florence.

Florence flourished.

Siena stopped developing.

But when they're together-- they're not united, the Sienese, unless they're fighting someone


When they're together they're down to 17 different districts, or the contrada, and that's erasing

the Palio-- well, nine of the 17 qualify to race here.

And once again, this isn't an affectation.

These contrada-- they really dislike each other.


So let's do the math.

There's what?-- 3,000-odd people in each contrada.

And I'm sure when the contrada get together, they probably don't like each other, either--

probably family disputes, or something.

But anyway-- Giuseppe-- we're not talking to him.

STEVE DIGGLE: It's a perfect and beautiful representation of this Italian genius for

division and internal fighting.

So the contrada get together to fight the Florentines.

And then, I suppose, at some level, the Tuscans get together to fight the Neapolitans-- GRANT

WILLIAMS: The -- STEVE DIGGLE: The Milanese-- and then, rarely, rarely, do the Italians

get together to fight someone else.

Well, I mean almost never, because it wasn't a country that was reunited until 1870.

GRANT WILLIAMS: Well, you see, I remember when I first read that.

And I had to go back and read it again.

So I'm thinking, Italy has been a country for less time than the United States, as we

understand it-- STEVE DIGGLE: About half the time.

GRANT WILLIAMS: Half the time-- and yet, there's so much history here.

So it's such a contradiction.

We're in a place that feels like it's just stopped in time.


GRANT WILLIAMS: Just, I mean, if you look around, it's remarkable.

Take away the awnings and the plate glass in the front of the store-- I mean, we're

centuries past.

STEVE DIGGLE: Think about the wealth of this place though.

Population-- let's say 100,000 in the 14th century.

They built this.

I mean, look at it-- the ambition, the wealth, the scale of the audacity.

Most towns of 50,000 to 100,000 people do not need a square this big or a municipal

premises this big.

So you go from a situation of enormous confidence, optimism, wealth, to a place that really doesn't

grow for 600 years.


But when we talk about growth, which is a big part of the debate about Europe and Italy,

this idea that the Italian economy is smaller, still, than it was in '08, whereas other economies

have grown-- we think of this in a small way.

But we're sitting in the middle of somewhere that hasn't really grown for centuries.

So that's a possibility.

It can happen.

STEVE DIGGLE: But radical ecologists would say, this is a great example of what happens

when you stop growing and you preserve things.

And they remain pristine and beautiful.

GRANT WILLIAMS: But we get this idea of growth on a world scale, where we've seen there was

always either a country-- a significant country or region that was growing at a decent clip--

6%, 7%, 8%, 10%, 12% in Italy or China-- and the fact you've had that one significant--

STEVE DIGGLE: Well, the reason you and I were in Asia was because that was where the growth



I mean, you had half the world's people, and it was growing rapidly-- first of all, Southeast

Asia, then North Asia, then China-- series of huge boosts to global growth from hundreds

of millions of people entering the global workforce-- becoming consumers-- GRANT WILLIAMS:

--and sucking in resources, sucking in labor-- We don't seem to have that now.

With China at 6 and 1/2% now-- STEVE DIGGLE: They say.


They say.

STEVE DIGGLE: I think it's probably more like 4 and 1/2%.

GRANT WILLIAMS: Even so-- but without that engine of growth, are we entering a world

where 2% to 3% is good-- which it feels to me we are, certainly in the West.

And if so, what does that mean?

What does that lower for longer mean?

Because here, it means nothing.

It means life goes on.

And it means-- this place is a moment in time that people from all over the world want to

come see, including the massive group behind us that's just emptied out of a coat somewhere.

But what happens?

Is that where the world is going to be now?

STEVE DIGGLE: There's no problem with growing with 3% a year.


I mean, if you grow at 3% a year, it means your economy doubles every generation.

That's not bad.


It's not.

STEVE DIGGLE: On long-term historical perspective, that's pretty good, as long as you don't have

a massive war, or famine, or disease that-- GRANT WILLIAMS: Or-- STEVE DIGGLE: --wipes

you out.

GRANT WILLIAMS: --unsupportable debt.


Well that's another matter.

I mean, the only way that that sort of growth becomes problematic is for two reasons.

One, if you're already very poor, that's going to be bad.


So if you're stuck in a poverty trap, and you're growing slowly, then that's going to

cause a real level of dissent.

The other thing is, if you enter a period of low growth-- and Italy is a great example

of this-- with too much debt-- because the only way you really ever truly dissolve debt

is inflation or growth-- GRANT WILLIAMS: Correct STEVE DIGGLE: --neither of which we have.


So what does that mean for Italy?

STEVE DIGGLE: So if you enter a period of time where your demography is not constructive--

Italian demography is not constructive-- clearly, immigration is highly problematic.

What does that mean?

It means that Italy and Japan obviously have the worst-- some of the worst-- demographics

in the world.

And they both have huge levels of sovereign debt.


In Japan, it's now over-- what?

200% and-- GRANT WILLIAMS: 240%, I think it is.


Italy's-- what?

GRANT WILLIAMS: Here, it's 130%?

STEVE DIGGLE: 130%, yeah.

So you've got an economy that's still stuck around $2 trillion.

Sovereign debt's around 2.4.

And growth is, well, nil, for a decade.



And that's problematic.

And-- STEVE DIGGLE: That's the problem.


STEVE DIGGLE: That's the problem-- servicing and eventually maybe even possibly paying

down the debt-- that's not likely to happen any time soon-- becomes increasingly problematic.

That debt is what traps Italy inside this box with the EU, because Italy needs to be

a member of the European Union in order to have low rates in order to service-- it's

unserviceably high debt.


That's why Quitaly is not going to happen.

They can't afford to because rates would double.

That would mean, effectively, the entire Italian budget would go to service of the debt.

GRANT WILLIAMS: But if they do that, and they go back to the lira, is there a possibility

of a reset of some sort?

I mean, obviously, it's going to ripple.

There's going to be-- STEVE DIGGLE: This is not-- GRANT WILLIAMS: -- STEVE DIGGLE: --something

that Italy hasn't been through before.

Not without a default.



STEVE DIGGLE: Not without a default.

GRANT WILLIAMS: Exactly right.

STEVE DIGGLE: But that's happened before-- GRANT WILLIAMS: Sure.

For it to happen to a G7 country would be astonishing, but is that a way out for Italy?

STEVE DIGGLE: It's a way out, but it's a bit like dropping the H bomb, isn't it?


But if you're prepared-- if we are getting down to the negotiation stage of this-- if

you're prepared to put that on the table-- which, let's face it.

The Greeks were.

The Greeks put that on the table-- fudged it, obviously.

We don't know what kind of backroom deals were made with the Greeks or backroom pressure

put on them.

So there's no-- didn't seem any deal made.

But they got the bailout they needed.

If you're prepared, which the League and 5Star claim to be-- to go to any lengths to stick

it to the Europeans-- could we see that as some kind of standoff, do you think?

STEVE DIGGLE: I think the fact that, as you mentioned, Italy is a G7 country-- maybe it's

someone in Congress, it is.

The pride that Italy has in itself is on a different level to the Greeks, I think.

I mean, there are certain similarities, but there's some very important differences.

I mean, this place is a testament to the pride the Italians feel-- GRANT WILLIAMS: Sure.

STEVE DIGGLE: --in themselves and their achievements.

So I think it's unlikely to end up there.

But in a sufficiently antagonistic situation, given the domestic situation in Italy and

the increasing frustration of Italians with Brussels, I don't think it's impossible.

So if they want to have more fiscal stimulus and some way to break out-- if they break

out, the monetary rates go higher.

So that's the trap.

GRANT WILLIAMS: Well, this is why sitting here is so apposite to talking about this--

because at that point, they necessarily, I guess, all become Italians again.

And Italy becomes one contrada inside Europe.

And the Grillos and the Northern Leagues of the world are fighting for their contrada

in amongst this wider scope.

And if you galvanize Italians into that kind of frame of mind, who knows what you can achieve?



I mean, clearly, that's a possibility.

It strikes me as pretty unlikely.

I mean, one of the other Achilles' heels that Italy has is not just its sovereign debt--

it's this banking crisis, which is one the reasons we should come here to Siena-- because

the banks are in a very poor state and have remained in a poor state.

They never really recovered since 2007.

They've been in a state of either denial or denying how bad the problem is, but against

total borrowings of $2.2 trillion-- about one times GDP-- approximately 11% to 12% of

that is nonperforming.

GRANT WILLIAMS: Well, I mean, as you said, the beauty of being here in Siena, just up

that hill, is one of the oldest banks in the world.

STEVE DIGGLE: I think it's the world's oldest continuously operating bank, established in


GRANT WILLIAMS: So it feels rude for us to talk about Italian banks without-- can we

go and take a look at Monte dei Paschi?

So maybe we'll just get the check, finish our coffees, and go and take a look up there.

What do you reckon?



The fate of Italy's banking system, for better or worse, seems inexorably tied to its place

at the heart of the European Union.

The fragility of Italy's banks mirrors that of the country as a whole, and their reliance

upon state aid and low interest rates have placed them in increasingly perilous situation.

STEVE DIGGLE: Here we are-- Monte Paschi.

Monte dei Paschi-- world's oldest continuously operating bank and pretty nice building.


STEVE DIGGLE: Here's a guy who's just seen the balance sheet of the current Monte Paschi.

He's not looking very happy about this.

GRANT WILLIAMS: It's just reason.

STEVE DIGGLE: So formed in 1472-- Monte dei Paschi-- Mound of Piety.

So it was formed as a charitable organization whose profits all went to charity in the local

area, and that's carried on even to this day.

1472-- continuously operated.


So six-- almost six centuries.

STEVE DIGGLE: Almost six centuries.

400-- no.

572 years as a private enterprise continuously operated-- went public in 1999.

Since then, in the last 18 years, it's had three government bailouts.

GRANT WILLIAMS: It's extraordinary, isn't it?

I mean, it's truly extraordinary.

And it speaks volumes about what we spoke about-- incentives, responsibilities-- right


I mean, it's writ large.

STEVE DIGGLE: After they IPO'd in 1999, they trebled the balance sheet in seven years.

Stock hit an all time high of current money-- because it's been recapitalized several times

now-- EUR 9,300 in the summer of '07-- GRANT WILLIAMS: Perfect.

STEVE DIGGLE: --current price around EUR 1.6-- so you really want to meet the guy who paid



STEVE DIGGLE: --and find out what his strategy is for breaking even.


I average down, obviously.

GRANT WILLIAMS: You're in at 4 and 1/2 grand, and things are looking better.

STEVE DIGGLE: It may be a lesson to people on averaging down.


So what happened here?

They trebled the balance sheet.

And then when '08 came, and everything got really bad really quickly, ultimately, 45%

of their entire debt base was considered to be non-performing.

GRANT WILLIAMS: 45%-- I mean, how do you find that many bad credits?

STEVE DIGGLE: And a third of it is still essentially non-performing.

So a third of the $150 billion that they created-- or $100 billion they created anew.

When you actually look into what happened, I mean, this is obviously the worst.

But UniCredit was 207 euros in the summer of '07-- 11 right now.

So it wasn't that Monte Paschi was unusual, right?

Keynes's famous rule, right?

If you're a banker, the one thing you must never do is fail idiosyncratically.



STEVE DIGGLE: Always fail together.

And they all did the same thing.

It's just, these guys did it more and more aggressively and from a smaller capital base.

And they were trying to catch up.

GRANT WILLIAMS: But that mindset change from a 500-year-old institution-- how does that

happen so fast?

Because new guys come in-- OK.

We've got a great idea because we need to grow-- how about we list-- It'll be great.

We get access to more capital.

I mean, it's-- STEVE DIGGLE: And we'll be able to create an incentive to attract real

talent, because then we'll have a currency.

So then we'll be able to offer incentives.

We'll be able to offer bonuses.

And what did the bank want to do?

Wanted to expand its balance sheet.

So what were the managers being incentivized to do?

Expand the balance sheet-- not make a profit-- not make a-- GRANT WILLIAMS: Lend more money.

STEVE DIGGLE: --but make a solid, long-term financial organization expand the balance


That's what we're going to incentivize you to do.

And you've got to say, they did it.

300% increase.

GRANT WILLIAMS: Well, they did, but-- STEVE DIGGLE: --in seven years.

That's pretty good.

GRANT WILLIAMS: Everybody watching it uses that as their metric to evaluate.

The whole thing is so circuitous, that we're going to expand the balance sheet.

We're going to lend more money.

And the people watching it go, they're lending more money.

This is great for the business.

The business is growing.

It's-- I mean, it's ludicrous-- STEVE DIGGLE: Why would you ever value a business on revenues?

Why would you ever value a business on revenues?

I can sell you $1 at 99 cents all day.

My revenues are going to look spectacular.


STEVE DIGGLE: I have no idea.

Why would anyone want a business with lots of revenues?

You actually want, just, a business that makes a profit.

Now, banking does make a profit.

Look at this.

They built this with profits.

GRANT WILLIAMS: From a bench over there-- STEVE DIGGLE: From a bench-- GRANT WILLIAMS:

--to this.

STEVE DIGGLE: It's a profitable business, if you do it right.

But if you do it badly, you can run out of money extremely quickly.

GRANT WILLIAMS: And go out of business.

But that's the whole point, right?

It's a really simple business to grow steadily.

If you want to start growing exponentially, the only way to do it is to take unnecessary



That's the way.

STEVE DIGGLE: So why is the Italian banking situation so much worse than most other places?

It wasn't that they did anything extraordinary.

Monte Paschi had a specific derivatives catastrophe, and the lending was reckless.

But all the other banks are somewhat similar.

I mean, they're obviously better-- GRANT WILLIAMS: In all the other countries, this is a common

or garden banking problem.

STEVE DIGGLE: It's 68% owned by the government, by the way, now.

So the IPO has been 2/3 reversed anyway.


STEVE DIGGLE: It used to be owned by a mound of piety.

Now-- It's 68% owned by the Italian taxpayer, who's really underwater as well.

So what went wrong here is just another chapter in the story, which is-- this is what banks

do when credit conditions are eased and they're under an incentive to expand their balance


It's not really fundamentally different to what happened in America.


STEVE DIGGLE: But there is one major difference, which is that, since 2008 the American economy

has expanded.

It's now significantly bigger than it was in 2008.

That means, even those bad debts, eventually, they get dissolved.


I mean, eventually, economic growth solves all your problems.

You haven't had economic growth in Italy for 10 years.

You've got 55 million people-- most of them employed-- most of them doing a good job.

And you've seen zero economic growth.

And that's what makes the Italian problem so serious, because without growth, you can't

grow your way out of your problems.

And you're stuck.

You're not lending.

Well, we know they're not lending because we have this huge credit problem in Italy

in 2013, 2014, where no one could get credit.

We haven't been able to get credit on anything we've tried to do here.

So credit's effectively dried up.

So what's your plan?

Your plan is to work out of your way out your bad debts?

Well, guess what?

For that, you need rising asset prices for that.

You need-- GRANT WILLIAMS: Correct.

STEVE DIGGLE: --economic growth.

So it's a huge problem.

And it's not getting any better.

In fact, you can see the fact that the share prices have all collapsed.

I mean, there was a reasonable banks in them.

Monte Paschi got back to, like, 1,100 in the summer of 2014.

GRANT WILLIAMS: One last chance to lose all your money, if you're a trader.

STEVE DIGGLE: You're only down 90% at that point.




But this is the thing-- all these bounces.

If you look at the underlying business, no one's buying this stuff because the business

is getting it.

They're buying it because it's gone from 9,000 to whatever.

There's a bounce here.

And so these things just become trading vehicles.

You've got all the debt-- the sovereign debt of Italy is now littered across the balance

sheets across Europe-- the banks here-- the banks of France.

There's 9 billion Italian sovereign debt on French balance sheets.

German banks are stuffed to the gills with this stuff.

It just keeps going around, and around, and around.

STEVE DIGGLE: Well, France and Spain together have pretty much the same level of bad bank

non-performing loans as Italy, but Italy is concentrated.

It's larger.

And there's no economic growth.

So that really ties the current banks into the political crisis.


Of course.

STEVE DIGGLE: Because the Italian government owes the world EUR $2.4 trillion.

The bans have lent about a similar amount, and at least 10%-- probably more like 12%,

13% of it-- is bad.

That means they need the EU to continue to support them.

So that makes things a bit more difficult.

But one thing that I keep coming back to is, why isn't the Italian economy growing?

Look around.


It's the fifth most visited country in the world for a reason.

It's beautiful.

It's fecund.

It exports things all around the world.

They make things that people want, unlike Greece.

I mean, they make furniture.

They make clothes.

They design beautiful buildings.


STEVE DIGGLE: Make good cars, right?

So what the hell is going on?

Why aren't they growing?

And yes, consistently, the message from Italian politics is, we've got to blame Brussels.

And I say, yeah.


I see that.

And I have a lot of sympathy for it.

But look at the situation in Italy that stops the economy growing.

What is it?

It's not the people.

It's not the geography.

It's not the talent.

What is stopping this place growing is the suffocating bureaucracy.

And have a look at yourself, right?

As one Italian says to another in one of Shakespeare's plays, "It is not the fault, dear Brutus,

lies not in our stars, but in-- GRANT WILLIAMS AND STEVE DIGGLE: --ourselves-- STEVE DIGGLE:

--that we are underlings."

This country is 75th in the World League of ease of starting a business.


STEVE DIGGLE: It's below the Democratic Republic of Congo.

That's not Brussels.


STEVE DIGGLE: That's Italy.

GRANT WILLIAMS: That's true.

STEVE DIGGLE: It ranks 111th in getting credit-- well, partly, thanks to these guys having

no more money.

GRANT WILLIAMS: It's just remarkable, right?


STEVE DIGGLE: It ranks 112th in paying taxes.


It's a G7 country.

It ranks 112th.

It's behind another 111 countries.

There's only 175 in the entire index.


STEVE DIGGLE: It's not just about Brussels.

It's about this system that you've created that suffocates entrepreneurial flair-- and

deters people from coming here, and starting businesses, and growing businesses.

And these guys are a classic example of that because you've got to have a functioning banking


So for a window of about four years, these guys-- Boba Monte, as they're known, Father


Anyone could just rock up with a stupid business plan and walk away on a check, right?

Particularly if they were local.

And then all of a sudden, that doesn't work out.

And now you can't have a penny, even if you've got a great business plan.

It's a terrible way of running things.

And then, probably most depressing of all, it continues to rank really badly on this

global perception of corruption-- about 54th, I think.


STEVE DIGGLE: --just behind Namibia.


STEVE DIGGLE: --one ahead of Saudi Arabia-- G7 country.

GRANT WILLIAMS: So in terms of coming out of this-- the one thing you can rely on is

that, at some point, credit will be extended willy-nilly again.

We have to get through the phase where they shut the doors and go right, we can't extend

credit to anybody.

So if there is some hope, it's that we all get crazy again, at some point, when the all-clear

is sounded.


I mean, that's fine.


I mean, to a certain extent, that will alleviate some of the symptoms.

But the underlying cause remains that in a country that ought to be one of the most prosperous

in Europe, a system that is weighing this place down and stopping it growing continues

to be in place-- and is hardly being challenged.

I mean, Macron, to a degree, in France, is talking about some of these issues.

We need to work harder.

We need to remove impediments to incentives.

We need to find a way of encouraging growth.

That debate's not happening in Italy.


I mean, the 5Star Movement are talking about massive subsidies for everyone.

We've suffered enough.

Let's open the spigot.

The League, actually, for all of their populism-- somewhat crazy nonsense and sometimes racism--

do have a strong platform of support for small businesses.

At least fair enough for that.

But really, the debate is all about immigrants.

It's all about bad Brussels-- throwing off the shackles of these people who've oppressed


Well, you know who's really oppressing you?

This ridiculously oppressive system of red tape, regulation, rules, inflexible, local

bureaucrats, too much regulation, too much corruption-- everything's hard-- hard getting

a permit, hard paying your taxes, hard establishing anything.

And so on, and so on, and so on.

And these guys just represent a monumental failure to support business.

That's what banks are supposed to do-- to equity and debt.

Debt can be syndicated through a bond market or it can come from banks.

It's not hard.


It's not.

STEVE DIGGLE: It's not hard.

GRANT WILLIAMS: And when I look at this, that's the thing that I find so disappointing in

the whole thing-- because it's the same mistake that gets made over, and over, and over again.

This is nothing new under the sun.

It's a common or garden banking crisis.

Well, I mean, what an awful thing to be in existence.

STEVE DIGGLE: Well, if you really want a lesson on why a stock that is falling a lot is not

cheap, this is the one.


Exactly right.


Stock down 90% can still fall another 99% if it has a bad business-- even if it's a

big business.

GRANT WILLIAMS: The catastrophic destruction of a 500-year-old banking institution through

misaligned incentives, aided by access to artificially cheap capital, is emblematic

of all that ails not just Italy, but the world in 2019.

And the interconnectedness of Europe's bank and government debt ties them all together

in the worst way imaginable.

But it's not all the fault of Brussels bureaucrats.

When you see Monte dei Paschi, it kind of crystallizes what an absurd situation the

whole thing is.

I mean, this institution's been around for centuries.

STEVE DIGGLE: 6 and 1/2, right?

I mean, you'd think they would have managed to have spotted a few pitfalls in the road

over 6 and 1/2-- GRANT WILLIAMS: Well, and they probably did.

What they didn't spot what a currency union, and the pressures that all this massive securitization,

and that chase for profits-- that hunger for just turning another dollar instead of being


I mean, it's criminal, frankly.

It's a shame.

Really is.

STEVE DIGGLE: Well, whether it's criminal or not, I guess, needs to be made to be seen.

But it's a testament to how fragile things become when everyone chases the next quarter.



STEVE DIGGLE: And I think this is something that you and Tony Deden covered.


We did.

STEVE DIGGLE: --in quite a lot of detail.

And I think, for a lot of people, that was an interesting perspective on things because,

clearly, a lot of investors spend an awful lot of time looking for the next quarterly


Early traders live and die by those things.

But ultimately, what happens over the next 90 days doesn't really matter.

And I think one of the history teaches you is that, if you want to survive long-term,

you need to be looking further down the road than the next 90 days.

And you need to be planning for further than the next 90 days.

And there's a lot of criticism of short-term-ism in banking, in finance, and the way companies

are run.

But this comes back to the whole nature of-- capitalism rests on the proposition that people

respond to incentives.

And if you have company executives that are being incentivized or banking executives that

are being incentivized to make money every 90 days or every 180 days, they're going to

do that.


Yeah of course.

STEVE DIGGLE: They're going to do that.

There's probably no greater example in American banking history than the transformation of

Goldman Sachs from the private partnership to a limited company.

GRANT WILLIAMS: And then on to a listed company-- STEVE DIGGLE: A listed company.

GRANT WILLIAMS: --and into a bank holding company, right?

STEVE DIGGLE: Well, yes.

But a listed company-- and quite a lot of people were like, when did Goldman Sachs change

from this organization of bankers who were looking after an organization that had lasted

a long time and planning for the next generation, to be one that was just looking forward to

the next earnings date?

And the answer is-- the IPO-- Fundamental change in the way the organization ran itself

and behaved.

And it's just the same here.

I mean, you've got Italian executives-- but all people under tremendous short-term pressure

to produce constantly good results.

And of course, it's nonsense-- businesses, economies, life is cyclical.

You're going to have downturns.

You can't just turf everyone out because you've just had a weak quarter.

But it's the way people respond.

And to a certain extent, I've got some sympathy for the executives because, having run a hedge

fund-- which I was trying to run for a cycle, because we were long volatility, and you don't

always get volatility.

But eventually you do.

And you're under tremendous pressure to make money every month.

I'm like, it's really hard to run a fund for an economic cycle when investors are tapping

you on the shoulder to make money for every 30 days.

GRANT WILLIAMS: Well, I mean, that's just gotten worse.

And this year, this thing about listing is, obviously, everyone that is, then, involved

in running the company, sadly, can check and does check their net worth-- GRANT WILLIAMS

AND STEVE DIGGLE: --every five minutes.

GRANT WILLIAMS: And so you can't help but take your eye off the ball because, suddenly,

you have a bad day.

You can crystallize that and go, oh my god.

This cost me x today.

And it freaks people out.

I mean, it's backwards--.

STEVE DIGGLE: So what does that mean?

Listing's a bad idea?


I'm not saying listing's a bad idea.

But I think if your remuneration is so tightly tied up to the share price, I understand--

STEVE DIGGLE: So it's an alignment.

GRANT WILLIAMS: It's poor incentive.

STEVE DIGGLE: It's an alignment.

It's poor incentives.

GRANT WILLIAMS: It's always an alignment.

You said this to me so many times when we worked together.

You have to get the incentives right.

If you get the incentives right, the results will go the way you want.

If you get the alignment-- the incentives-- wrong, you're going to get bad results.

I mean, it's been proven time and time again.

STEVE DIGGLE: What do you think of this idea that you shouldn't get a vote in a company

until you've held the shares for a certain period of time?

You can't just turn up two minutes before the vote and-- GRANT WILLIAMS: I think it's

a great idea, frankly.

I really do.

I mean, I understand-- so if you got a share, you deserve a vote.

But if we want to try and create stability-- and even though there's an illusion right

now that we don't need to, because everything's fine-- we do.

I mean, this is a very fragile economic system.

That's a great way to go about it.

STEVE DIGGLE: So what would the curing period be?

30 days?

90 days?

180 days?

GRANT WILLIAMS: For me, I would rather it be longer-- STEVE DIGGLE: Really?

GRANT WILLIAMS: --than shorter.


I do, because I think if what you really want people voting who have a long-term interest

in the company-- not who are trying to make a change to effect some kind of short-term

outcome-- that's dangerous to me.

STEVE DIGGLE: Isn't that somewhat going to change the way stock markets work?

GRANT WILLIAMS: But how do they work right now?

I mean, do they work right now?

I would argue that perhaps they don't because the idea of price discovery, and the idea

of markets reacting to news the way they've always reacted to news, is completely gone.

They just don't do that any more.

STEVE DIGGLE: Well, I mean, between the algos, and the computers, and the ETFs, you've got

a big chunk of company ownership being held by computers who don't have a view-- and ETFs,

who are essentially passive.

GRANT WILLIAMS: Exactly right.

And for me, seeing Monte dei Paschi-- seeing this 5-centuryold-- STEVE DIGGLE: 6 and 1/2.

GRANT WILLIAMS: 6-and-1/2-century-old institution that has been brought to its knees by this

change and this renewed focus on short-term profits-- it speaks so loud to me.

It's almost deafening.


GRANT WILLIAMS: Before we headed back to Steve's to discuss the investment implications of

what we've seen, we had one more stop to make-- the wall town of Cortona, where we would discuss,

perhaps, the thorniest issue facing Italy-- immigration.

STEVE DIGGLE: Italians are looking for a European solution.

But when it comes to allowing immigrants in, everyone gets very nationalistic.

I think your point is exactly right, which is that, back in the status quo-- and that

Europe always winning and everything holding together has been a reasonably good trade--

Brexit excepted.

I think that level of complacency is very dangerous.

The Description of Will Italy Be the Next Country to Leave the EU? (w Steve Diggle & Grant Williams)